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November 1, 2011

Why Stocks May Continue October’s Rise—Searching for Alpha for November 2011

Worries over a potentially messy Greek default, and the possibility of debt problems spreading across Europe, partially explains last quarter’s stock losses, the worst calendar quarter since 2008.

Similarly, Europe’s plan to boost its bailout fund by a trillion euros, announced last week, partially explains October’s huge equity rally—the best month for stocks in nearly a decade.

So what’s next? With the market in “teeter-totter” mode, pattern recognition traders may be guessing that the next move is down. However, there are a number of reasons to think that last month’s favorable tone will last until the end of the year. To wit:

Hedge funds are in a hole, down around 8% YTD. They desperately need to make money this year, in many cases in order to survive. They have a big incentive to push the buy button and continue the current uptrend.

Earnings reports have been favorable. Among the 300 or so companies that have reported, roughly seven out of ten have beaten expectations.

Expectations regarding the Debt Super Committee are extremely low. As a result, it is unlikely they will disappoint. Even a few good ideas from this group of six Democrats and six Republicans could have bullish ramifications.

Note that the above bullet points are short-term in nature, and not particularly impactful if taken individually. But they should provide the fuel for the year-end rally to continue.

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